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A Study of State Board of Accountancy Members
The revolving-door phenomenon occurs when companies a employ former employees or owners of their audit firm in accounting positions. Many suspect this routine practice has a negative impact on auditor independence. One broadly proposed solution to mitigate this problem is a cooling-off period, a requirement that a certain amount of time must pass before former employees or owners from the current audit firm may accept employment with an audit client.
The Sarbanes-Oxley Act of 2002 (SOA) requires a one-year cooling-off period before publicly held companies may hire their auditor's former employees or owners for key positions. section 209 of the law indicates that state boards of accountancy should make an independent determination of whether a similar requirement is needed for nonpublic companies under their jurisdiction.
State boards of accountancy have the legal responsibility to regulate the professional relationships between CPA firms and nonpublic audit clients. State boards promulgate guidelines on independence and determine the services that CPA firms may perform for nonpublic clients within the board's jurisdiction. One purpose of independence guidelines is to protect the public interest As such, state boards of accountancy are advocates for users of audited financial information. Failure of CPAs to follow state boards' guidelines could result in sanctions or other penalties, including the revocation of licensure.
Given SOA's call for consideration of its provisions at the state level, the authors conducted a study to investigate the perceptions of members of state boards of accountancy when nonpublic audit clients were involved in the revolving-door phenomenon. The results could assist state boards in determining whether the presence or absence of a cooling-off period influences perceptions of independence. Results may also provide state boards with relevant information to assist them in determining whetfier provisions similar to those of SOA should be mandated for nonpublic entities.
Independence and the Revolving Door
Independence is widely viewed as the cornerstone of the public accounting profession and is accorded that importance in Generally Accepted Auditing Standards (GAAS). Opinions are more mixed concerning whether the potential hiring of employees or owners of an audit firm jeopardizes the firm's independence. The practice has existed for years. As a recruitment tool, large CPA firms sometimes indicate to potential recruits that...